James Montier of Société Générale added:

“Gold kind of scares me because very often the people involved with it seem to be slightly insane. My other problem is I don't know how to value it. That said, I can certainly see why gold could be considered somewhat of an insurance policy, if not an investment in its own right. Any kind of systemic economic turmoil is likely to drive gold prices higher.”

For more discussion about the direction of stock markets, also see my post “Video-o-rama: Wishing you well, Mr O."

Economy

“Global businesses remain darkly pessimistic. Sentiment was at its worst in mid-December, but has improved only marginally since then,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “European and South American businesses are most worried, followed by North America; Asian companies are negative but less so. Pricing power has collapsed, suggesting that deflation is increasingly likely.”


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The latest US economic reports also indicate that the intensity of the economic downturn shows no sign of letting up. Homebuilding descended to an unprecedented post-war low, the National Association of Home Builders (NAHB) housing market index again reached a new low, and the ABC/Washington Post Consumer Confidence Index remained near its all-time lows. Interestingly, no president has entered office with such a poor level of consumer confidence since the beginning of the Survey in 1985.

Regarding the meeting of the Federal Open Market Committee (FOMC) on January 27th and 28th, Asha Bangalore (Northern Trust) said:

“The policy statement will be the first following the 0-interest-rate policy adopted at the last meeting. The explicit hint about the Fed’s future course of action in the December 16, 2008 policy statement read as follows:

‘The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.’

“We will be paying close attention to whether the Fed will retain or rephrase this part of the policy statement. With regard to the Fed’s views about economic growth and inflation ... we do not expect radical modifications of the entire policy statement.”

Elsewhere in the world, evidence mounted that the recession was spreading and deepening.
 

• The UK’s real GDP contracted by 1.5% in the fourth quarter, following a 0.6% decline in the third quarter. The data confirmed the first UK recession since 1991.
  
  
• China’s real GDP declined by 6.8% year on year in the fourth quarter. However, when recalculating China’s growth rate on a quarter-on-quarter annualized basis, like most other countries do, commentators are of the opinion that the Chinese economy might already be contracting.
  
  
• Japan recorded a fifth consecutive monthly trade deficit in December, marking the worst year for exports on record. Exports contracted by 35% year on year, compared with a 16% expansion as recently as July.
  
  
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Summarizing the economic situation, Nouriel Roubini (RGE Monitor) said:

“The US economy is, at best, halfway through a recession that began in December 2007 and will prove the longest and most severe of the post-war period. Credit losses of close to $3 trillion are leaving the US banking and financial system insolvent. And the credit crunch will persist as households, financial firms and corporations with high debt ratios and solvency problems undergo a sharp deleveraging process.

“Worse, all of the world's advanced economies are in recession. Many emerging markets, including China, face the threat of a hard landing. Some fear that these conditions will produce a dangerous spike in inflation, but the greater risk is for a kind of global ‘stag-deflation.’ We're likely to see vulnerable European markets (Hungary, Romania and Bulgaria), key Latin American markets (Argentina, Venezuela, Ecuador and Mexico), Asian countries (Pakistan, Indonesia and South Korea), and countries like Russia, Ukraine and the Baltic states facing severe financial pressure.

“The world's first global recession is just getting started.”

Week’s economic reports

Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data. Click here for a summary of this week's economic calendar from Yahoo.

In addition to the interest rate announcement by the FOMC (Wednesday, January 28), the US economic highlights for the week, courtesy of Northern Trust, include the following:

1. Leading Indicators (January 26th): Consensus: -0.3% versus -0.4% in November.

2. Existing Sales (January 26th): Consensus: 4.40 million versus 4.49 million in November.

3. New Home Sales (January 29th): Consensus: 400,000 versus 407,000 in November.

4. Durable Goods Orders (January 29th): Consensus: -2.0% versus -1.5% in November.

5. Real GDP (January 30th): Northern Trust: -4.5% Consensus: -5.4% versus -0.5 in Q3.

6. Other reports: Consumer Confidence (January 27th); Consumer Sentiment Index and Employment Cost Index (January 30th).

Markets

The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Bernard Baruch said: “If you get all the facts, your judgment can be right; if you don't get all the facts, it can't be right.” Hopefully the “Words from the Wise” reviews offer assistance to Investment Postcards’ readers in compiling the facts.

That’s the way it looks from Cape Town.